There are a number of areas where you need to take particular care and where there are some differences between Chinese and Western accounting practice. These are guidelines only as every business is different.
Adjustments for foreign related payment income
If the foreign company has paid any overseas insurance for their expat employees, it should be noted that this is not tax deductible unless it is recorded as a salary payment and with IIT paid. Foreign sourced income should be provided for by providing evidence of foreign taxes paid with the relevant foreign documentation. Otherwise, foreign taxes may be accrued by the FIE.
Related party transactions
If your FIE had any transactions with related parties, you must make sure that these were at arm’s length and with adequate documentation to substantiate the charges/income, so that the results were not materially affected by related party transactions that were not in the ordinary course of business. Pay particular attention to transfer pricing issues. Tax officials reserve the right to adjust transfer prices, interest charged by related parties based on market prices or even based on prescribed profit margin.
Withholding obligations
If the FIE made or accrued in its costs or expenses any payments, such as rental (including office and expat housing), royalty charges, interest, services or management fees for services performed in China by foreigners (individuals or organisations), pursuant to related contracts and agreement, the relevant withholding obligation should be provided for on an accrual basis. This means 10% withholding enterprise income tax and 5% business tax apply (the tax rate might be different according to each individual case). All the charges shall be accompanied by substantial evidence, otherwise they are not deductible. All the above debts in foreign currency also need to be registered with the SAFE prior to approval for remittance.
Input VAT
The VAT invoices must be verified by the tax bureau within 90 days of the invoicing date, otherwise they cannot be deducted. Furthermore, if you have any unusual loss of inventory, then the VAT input related to the inventory previously credited has to be reversed in the period when the loss is recognised.
Export VAT
For FIEs, export VAT refunds for the year should be reconciled with the tax bureaus within three months of the end of the year. FIEs should register all export receivables for the previous year with the bureau. Failure to do so may result in the export sales being deemed domestic transactions (subject to output VAT) if the payment for export sales is not received and related documents are not presented within the deadline.
Stamp Duty
Although not a material issue with much cost, FIEs should not forget to pay stamp duty on all books, records and applicable contracts. Fines for non-compliance outweigh the dutiable value.
